Investors seek safety as North Korea tension escalates; global stocks end off lows

NEW YORK (Reuters) - U.S. President Donald Trump’s warning to North Korea and Pyongyang’s threat of possible armed retaliation drove investors away from stocks and other risky assets on Wednesday and into textbook safe-havens like gold and Treasuries.

But despite the largest percentage drop in over a month on a global equities index, U.S. equities ended only slightly lower as healthy corporate earnings and a recent string of strong economic data enticed investors into beaten-down stocks.

Trump’s remarks on Tuesday afternoon that North Korea would face “fire and fury like the world has never seen” weighed on Wall Street and drove up the VIX “fear gauge” .VIX, or the cost of protection against a drop in the S&P 500.

The VIX closed 1.4 percent higher but at the lowest level of the day at 11.11, after rising as high as 12.63. Even so, the close was the highest in a month.

Following Trump’s remarks, North Korea on Wednesday said it was “carefully examining” plans for a missile attack on the U.S. Pacific territory of Guam, which is home to a large U.S. military base. U.S. Defense Secretary Jim Mattis told Pyongyang it should stop any actions that would lead to the “end of its regime and the destruction of its people.”

But while most traders appeared to favor safe-haven assets, bargain seekers helped Wall Street’s three major indexes pare the day’s earlier losses.

“It’s amazing when you consider the headlines just how calm the equity markets are, how they’ve taken things in their stride,” said Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina.

“The strong global economy driven by strong earnings is really helping to minimize some of these concerns. The global economy is really on some firm footing,” he said.

The Dow Jones Industrial Average .DJI fell 36.64 points, or 0.17 percent, to 22,048.7, the S&P 500 .SPX lost 0.9 points, or 0.04 percent, to 2,474.02 and the Nasdaq Composite .IXIC dropped 18.13 points, or 0.28 percent, to 6,352.33.

FRANC RALLY

Traditional safe-haven currencies including the Swiss franc and Japanese yen rose against the U.S. dollar.

The Wall St sign is picture in front of the New York Stock Exchange (NYSE) in New York City, New York, U.S., August 2, 2017. REUTERS/Carlo Allegri

“Obviously we are looking at the increased tensions between the U.S. and North Korea,” said Brad Bechtel, managing director FX at Jefferies in New York. “Tensions are still high and not going away at the moment. Safe-havens are bid and markets are a little uneasy.”

South Korea's won KRW=KFTC dropped 0.9 percent against the U.S. dollar to its lowest close since July 13.

The Swiss franc rose 0.01 percent versus the greenback, the most since late June, at 0.96 per dollar.

The Japanese yen strengthened 0.08 percent versus the greenback at 110.00 per dollar. Japan is the world’s biggest creditor country and there is an assumption that investors there will repatriate funds in a crisis.

Sterling GBP= was last trading at $1.3006, up 0.02 percent on the day.

The Swiss franc was on track for its biggest daily gain against the euro since the Swiss National Bank removed its cap on the currency in January 2015. It was last up 0.0 percent at 1.1329 per euro EURCHF=.

Yields on core government debt fell.

Benchmark U.S. 10-year notes US10YT=RR rose 9/32 in price to yield 2.2494 percent, from 2.282 percent late on Tuesday.

The 30-year Treasury bond US30YT=RR rose 27/32 in price to yield 2.8252 percent, from 2.867 percent late on Tuesday.

“The most visible impact of escalating verbal threats between North Korea and President Trump comes at the long end of the U.S. Treasury curve,” said Jim Vogel, interest rates strategist at FTN Financial in Memphis.

Oil prices rose after a report showed U.S. refineries processed record amounts of crude in the latest week, eating into inventories.

U.S. crude CLcv1 rose 1.08 percent to $49.70 per barrel and Brent LCOcv1 was last at $52.78, up 1.23 percent on the day.

Gold hit its highest level in almost two months after Trump added to the geopolitical anxiety by boasting of the strength of the U.S. nuclear arsenal.